Preparing for IR35 Reform – April 2021
Frequently Asked Questions
What is IR35?
IR35 is essentially a series of tests that determine the tax status of contractors working through limited companies (PSCs). These tests include whether there is financial risk to the worker, the existence of a right of substitution, the presence or otherwise of mutuality of obligation, and whether the role is subject to supervision, direction and control, designed to ensure that workers pay the correct amounts of Tax and National Insurance Contributions (NICs).
In the Private Sector it is currently the responsibility of the worker to determine their IR35 status and to account for tax and NICs to HMRC on this basis.
What are the new rules?
The new rules for the private sector are broadly similar to those introduced in the public sector in April 2017, meaning that as of 6th April 2021 it will be you, the hirer, not the contractor, who decides the IR35 status of a given assignment.
This means that for every contract you agree with an agency or worker you will need to:
- Decide, using the guidance provided by HMRC, or a specialist third party provider of IR35 assessments, whether or not IR35 applies to the assignment in question
- Advise the worker, and the agency of your decision and the reasons for it – the ‘Status Determination Statement’
- Keep detailed records of your employment status decisions, along with the reasons for them
- Ensure that you have a process in place to deal with any disputes that arise from your decisions
You must take reasonable care when you make your decision about the IR35 status of a worker; failure to do so may result in you becoming liable for payment of any unpaid or underpaid tax and NICs.
It’s important that you ensure that a Status Determination Statement is provided for all workers operating via limited companies. Until this is done, you’ll remain responsible for the deduction of PAYE tax and NICs from the worker(s) in question.
A Status Determination Statement produced before 6th April 2021 will be valid when the new rules come into force as long as it details the reasons for the decision that was reached. However, if the working practices of the engagement change, or a new contract is entered into with the worker, you should check your original decision to ensure that it remains valid; if not you will need to reassess the role.
Where a role has been deemed to be caught by IR35, the Fee Payer – the party paying the worker (usually the agency) – will need to deduct tax and National Insurance Contributions at source, whether the worker is being paid directly as an individual, or has chosen to continue to receive payment via their limited company.
When do the new rules come into force?
The new rules come into force on 6th April 2021.
Who do the new rules apply to?
The new rules apply to Private Sector organisations that engage workers either directly, or through an agency, and who provide their services via a Limited Company or Limited Liability Partnership (PSC).
However, there is an exemption for smaller companies; if you meet two or more of the following criteria you qualify as a small company and the new rules will not apply, i.e. it will continue to be the contractor, not you, who determines the IR35 status of the assignment:
- A turnover of less than £10.2 million
- A balance sheet value of no more than £5.1 million
- No more than 50 employees
Apart from this small companies’ exemption, the new rules apply to all private sector organisations, including third sector such as some charities.
What happens if a worker disputes your IR35 decision?
If a worker disagrees with your IR35 determination they should appeal directly to you, or contact their agency, who can do so on their behalf.
You must respond to an appeal within 45 days, during which time the worker should continue to be paid according to your original decision. Your response must state whether or not the original decision has changed and an explanation of the reasons for this.
If you do not respond to an appeal within 45 days, then you’ll automatically assume the role of Fee Payer and regardless of whether an agency or other intermediary is involved, become liable for any unpaid, or underpaid, tax and NICs.
What do we need to do before 6th April 2021 to ensure a smooth transition to the new rules?
First and foremost you should, in good time, establish a list of all non-permanent contract staff providing their services via limited companies that are likely to be working for you on 6th April 2021; these may be:
- Contractors providing their services to you directly
- Agency workers
Regardless of which category the workers fall into, you’ll need to assess each individual worker based on HMRC guidance.
For those contracting with you directly, you’ll need to advise them of your decision in writing, along with the reasons behind it.
For those provided by agencies, you’ll need to advise both the worker and their agency in writing of your decision, along with the reasons behind it.
Once this initial work has been done it will be important that you put in place:
- A reliable process for ensuring that all new contractors, along with their agencies, are advised of your decision, and the reasoning behind it, as to the IR35 status of their roles in advance of their commencing work
- A mechanism whereby any changes to working practices and any renegotiations of contracts are highlighted and reviewed to establish whether they result in a change in employment status for the worker(s) affected, and
- A robust process for picking up and resolving appeals against your employment status decisions from workers and/or their agencies